College Loan Defaults Hit Highest Level Since '97

Borrowers defaulted on federal student loans at an 8.8 percent rate for fiscal 2009, up from 7 percent a year earlier, the U.S. Education Department said Monday.

The statistic covers borrowers whose first loan repayments were due during the year that ended Sept. 30, 2009, and who had defaulted by Sept. 30, 2010. About 320,000 out of 3.6 million borrowers in that group were in default, which the department defines as being at least 270 days late on a payment. The official 2009 rate fell slightly from an 8.9 percent estimate released in May.

The rate at for-profit colleges, such as University of Phoenix owner Apollo Group Inc., rose to 15 percent in fiscal 2009, from 11.6 percent a year earlier.

“Borrowers are struggling in the economy,” Education Deputy Undersecretary James Kvaal told reporters on a conference call. “We do see a strong relationship between student loan default rates and unemployment rates.”

The 2009 rate was the highest since an 8.8 default rate in 1997, while less than half the peak of 22.4 percent in 1990.

“Certainly, right now, things are tough, even for college graduates,” said Lauren Asher, president of the nonprofit Institute for College Access and Success in Oakland, California.

The U.S. unemployment rate has been at 8.8 percent or higher since April 2009.

Loan Amounts

The 2009 defaults represented about $2.4 billion, out of $46.6 billion of loans to borrowers who faced their first payments in that fiscal year, the education department said.

Most of the loans will be collected sooner or later, Kvaal said. The government can require employers to withhold part of a borrower’s paycheck, file lawsuits or use collection agencies, and may recoup money from tax refunds or other government payments.

Defaults understate the number of students who are facing difficulty making loan payments, reflecting the “tip of the iceberg in terms of borrower distress,” Asher said.

The statistics released today measure defaults over two years after the borrowers begin to face repayment of student loans. The department plans to shift to a practice of measuring defaults over three years, which likely will increase the rate, Asher said.

The biggest impact of default is on students who face damaged credit ratings, Asher said. “The consequences of default are severe for borrowers and can affect them for a lifetime,” she said.

For-Profit Colleges

Growth in for-profit colleges, which had disproportionately high default rates, contributed to the rise in the default rate, Kvaal said. More than 150,000 of the 320,000 2009 defaults were at for-profit institutions, according to the department.

Default rates among students at for-profit colleges have led the Obama administration to increase regulation and Congress and state attorneys general to conduct investigations.

Borrowers attending for-profit colleges defaulted at more than twice the 7.2 percent rate for those at public colleges and three times the 4.6 percent rate at private nonprofit institutions, according to the Education Department.

Since the 2009 group of borrowers took out loans, the Education Department has introduced a program that caps repayment amounts based on income and family size. The income- based repayment plan can help students handle their debts, Asher said, though it’s not available after a borrower defaults.